India’s External Trade Policy: Current Account, FTAs & EXIM Strategy for UPSC
Complete analysis of India's trade policy covering merchandise and services trade, current account deficit, FTP 2023, RoDTEP, FTAs with UAE, Australia, EFTA, WTO issues, and trade agreements for UPSC GS-III.
India’s merchandise exports touched $437 billion in 2023-24. Imports stood at $677 billion. That is a trade deficit of $240 billion — the gap between what India sells and what it buys from the world.
But here is what most students miss: India runs a surplus in services trade of approximately $160 billion (driven by IT services, business process outsourcing, and professional services). When you combine goods and services, India's current account deficit (CAD) was approximately 1.2% of GDP in 2023-24 — a comfortable level by international standards.
Understanding India's trade profile requires looking at four dimensions: what India trades, with whom, under what policy framework, and through which bilateral and multilateral agreements.
India's Trade Profile: The Numbers
Top Export Destinations (2023-24)
| Rank | Country | Export Value ($ bn) | Key Items |
|---|---|---|---|
| 1 | United States | 77.5 | Petroleum products, pharmaceuticals, gems & jewelry, IT services |
| 2 | UAE | 35.6 | Petroleum products, gems & jewelry, food items |
| 3 | Netherlands | 17.3 | Petroleum products, chemicals, machinery |
| 4 | China | 16.7 | Iron ore, organic chemicals, seafood |
| 5 | Bangladesh | 13.5 | Cotton, petroleum products, vehicles |
Top Import Sources (2023-24)
| Rank | Country | Import Value ($ bn) | Key Items |
|---|---|---|---|
| 1 | China | 101.7 | Electronics, machinery, telecom equipment, active pharma ingredients |
| 2 | Russia | 61.4 | Crude oil (share surged post-2022) |
| 3 | UAE | 48.3 | Crude oil, gold, LNG |
| 4 | Saudi Arabia | 33.8 | Crude oil, LPG, fertilizers |
| 5 | United States | 31.9 | Machinery, aircraft, medical instruments |
Key structural feature: India’s import bill is dominated by crude oil and petroleum products (approximately 22-25% of total imports), gold (7-8%), and electronics/telecom (12-15%). The dependence on China for electronics components and active pharmaceutical ingredients (APIs) is a strategic vulnerability.
India's trade deficit with China alone: approximately $85 billion in 2023-24. This is the single largest bilateral deficit.
Common student mistake: Students often confuse trade deficit with current account deficit. Trade deficit covers only merchandise (goods). CAD includes goods, services, primary income (investment returns), and secondary income (remittances). India's services surplus and massive remittance inflows ($125 billion in 2023-24, highest globally) significantly cushion the merchandise deficit.
Foreign Trade Policy 2023: The Framework
The Foreign Trade Policy (FTP) 2023, released in March 2023, replaced FTP 2015-20 (which was extended twice during COVID). Key features:
Target: $2 trillion in goods and services exports by 2030 (from approximately $770 billion in 2023-24).
Shift from incentives to facilitation: FTP 2023 moves away from direct export subsidies (which face WTO challenges) toward process simplification, technology integration, and district-level export hubs.
Key schemes under FTP 2023:
RoDTEP (Remission of Duties and Taxes on Exported Products)
Replaced the earlier MEIS (Merchandise Exports from India Scheme) which was struck down by a WTO dispute panel in 2019 (US challenged it as an illegal export subsidy).
RoDTEP reimburses embedded taxes on exported goods that are not refunded under GST or other mechanisms (fuel taxes, mandi taxes, electricity duties). Rates range from 0.5% to 4.3% of FOB value depending on the product.
Budget allocation: approximately Rs 15,000 crore annually.
EPCG (Export Promotion Capital Goods)
Allows import of capital goods at zero customs duty for exporters who commit to export 6 times the duty saved within 6 years. This helps manufacturers upgrade technology without the import duty burden.
Advance Authorization
Allows duty-free import of raw materials for goods that will be exported. The exporter must fulfill the export obligation within 18 months.
Amnesty Scheme
FTP 2023 introduced a one-time amnesty for exporters who could not fulfill past export obligations under EPCG and Advance Authorization. They could settle by paying customs duty plus reduced interest.
SEZs to DESH: The Evolving Framework
Special Economic Zones (SEZs) were India's flagship export-led development model. At their peak, India had 268 operational SEZs. But performance has been disappointing:
- SEZ exports: approximately $155 billion (2023-24), heavily concentrated in IT/ITeS
- Manufacturing SEZs underperformed expectations
- Tax benefits (15-year corporate tax holiday) expired for many units
- SEZ Act 2005 faced land acquisition controversies
The proposed DESH Bill (Development of Enterprise and Service Hubs) was announced to replace the SEZ Act. It aimed to:
- Rename SEZs as "Development Hubs"
- Allow domestic sales alongside exports (SEZs currently restrict this)
- Bring existing SEZs under the new framework
- Provide flexible incentive structures
As of early 2026, the DESH Bill has not been introduced in Parliament. The government has instead made incremental changes to SEZ rules through notifications.
This connects to India's broader FDI strategy and the Make in India manufacturing push.
Free Trade Agreements: India's Bilateral Strategy
India historically avoided aggressive FTA participation, fearing that opening markets would hurt domestic manufacturers. The experience with ASEAN FTA and South Korea CEPA (both signed 2009-2010) reinforced this — India's trade deficit with ASEAN widened after the FTA.
But from 2022 onwards, India has pursued a calibrated FTA strategy, selecting partners carefully.
Comparison of India's Recent Trade Agreements
| Agreement | Partner | Signed | Key Features | Status |
|---|---|---|---|---|
| India-UAE CEPA | UAE | Feb 2022 | Tariff elimination on 80% of goods. India gets zero-duty access for gems, textiles, pharma. UAE gets zero duty on gold, some chemicals | In force |
| India-Australia ECTA | Australia | Apr 2022 | Tariff reduction on 85% of Australian goods, 96% of Indian goods. India gains access for textiles, pharma, IT. Australia gains for wine, wool, coal | In force |
| India-EFTA TIEPA | Switzerland, Norway, Iceland, Liechtenstein | Mar 2024 | EFTA commits $100 billion investment in India over 15 years. India reduces tariffs on Swiss watches, chocolate. India gains for pharma generics, IT services | In force |
| India-UK FTA | UK | Under negotiation | 13 rounds completed by 2025. Sticking points: agriculture market access, data localization, immigration (Mode 4), IP (Scotch whisky GI) | Ongoing |
| RCEP | ASEAN+5 | Walked out 2019 | India withdrew over concerns about Chinese goods flooding market, dairy/agriculture vulnerability | India not a member |
Why India Left RCEP
India walked out of the Regional Comprehensive Economic Partnership (RCEP) in November 2019. Reasons:
- China risk: Zero-tariff access for Chinese goods would devastate Indian manufacturing (already facing $85 billion deficit)
- Dairy and agriculture: New Zealand and Australia's dairy exports would undercut Indian dairy farmers
- Auto-trigger safeguard: India's demand for automatic safeguard measures against import surges was not accepted
- Rules of origin: Weak rules would allow Chinese goods to enter India through ASEAN countries
UPSC 2020 Mains asked about the implications of India's exit from RCEP. The answer must balance strategic concerns against the cost of being outside Asia's largest trade bloc.
Balance of Payments: The Structural Picture
India's balance of payments position has improved structurally over the past decade:
- Foreign exchange reserves: approximately $640 billion (2025), covering 10+ months of imports
- CAD: manageable at 1-1.5% of GDP
- Remittances: $125 billion (2023-24) — world's highest
- FDI inflows: $70-80 billion annually
- FPI (Foreign Portfolio Investment): volatile but net positive over the decade
The RBI manages the exchange rate through a managed float system. It intervenes to prevent excessive rupee volatility but does not target a specific exchange rate. Read more about RBI's monetary policy framework and its impact on external sector management.
WTO: India's Position on Key Issues
India has been an active participant in WTO negotiations, often leading the developing country bloc. Current flashpoints:
Agriculture Subsidies
India's aggregate measurement of support (AMS) for agriculture exceeds the WTO's 10% de minimis threshold for developing countries when calculated at external reference prices. However, India argues:
- The reference prices (fixed at 1986-88 levels) are outdated
- Public stockholding for food security should be exempt
- The Peace Clause (Bali 2013) provides interim protection, but India wants a permanent solution
Fisheries Subsidies
The WTO's fisheries subsidies agreement (2022) restricts subsidies that contribute to overfishing. India's concern: the agreement disproportionately affects developing countries with artisanal fishers while allowing historical subsidizers (EU, Japan, South Korea) to continue under existing exemptions.
Dispute Settlement Reform
The WTO Appellate Body has been non-functional since December 2019 (US blocked new appointments). India supports restoring a binding two-stage dispute resolution mechanism.
India's relationship with WTO is central to understanding the constraints on domestic trade policy.
Investment Facilitation
India opposes the plurilateral Investment Facilitation for Development Agreement, arguing it could restrict policy space for regulating FDI and imposing performance requirements on foreign investors.
The $2 Trillion Export Target: Feasible?
Reaching $2 trillion in exports by 2030 requires a compound annual growth rate of 15% from the 2023-24 base. The challenges:
- Global trade growth is slowing (WTO projects 2-3% growth annually)
- Geopolitical fragmentation (supply chain reshoring, friend-shoring) creates both opportunities and risks
- India's share in global merchandise exports is still just 1.8% (compared to China's 14%)
- PLI (Production-Linked Incentive) schemes in 14 sectors aim to boost manufacturing exports, but results are mixed
The opportunities: electronics manufacturing (Apple, Samsung expanding Indian production), pharmaceuticals (generic drugs to regulated markets), textiles (benefiting from China+1 strategy), and defence exports (target $5 billion by 2025, achieved $2.6 billion in 2023-24).
District Export Hubs (DEH), launched under FTP 2023, aim to identify export products at district level. 761 districts have been mapped to specific products, and institutional support is being created.
The Startup India ecosystem and Digital India infrastructure are also expected to support services exports growth.